Digital money systems are being developed to offer methods of payment that are cheap, efficient and secure; that can be used over the Internet without the need for online authorisation or the exchange of physical tokens; and that are also practical, unlike credit cards, for small value transactions and for transactions between individuals.

"Digital gold-backed bonds or other digital gold instruments could have significant advantages over the use of established currencies," says Washington-based, digital money expert Richard Rahn of Novecon and the author of the report. Already one group - e-gold - is offering digital gold as a means of financing trade over the Internet while a second - GoldMoney - is expected to launch shortly.

"Gold has two key advantages," says Rahn in the report 'Digital Money & Its Impact on Gold' which was commissioned as a contribution to the debate into the current and future role of gold as a monetary instrument. "First, many people instinctively trust it. It is tangible, free of government control and the idea that gold is intrinsically valuable is ingrained in folk history. Thus a digital currency perceived to be adequately backed by gold would have an automatic advantage in competing for people's trust over many other currencies."

The second important advantage of gold as a digital currency, he says, is the substantial demand that already exists for holding gold assets for purposes other than as a medium of exchange. "This pre-existing demand for gold assets gives gold an important head start over all competitors, except major national currencies."

"Like the US dollar gold is recognised worldwide as a store of value. This certainly makes digital gold a candidate as an international digital medium of exchange," he adds.

Rahn acknowledges that digital-gold also faces obstacles. Currently, few businesses accept gold in exchange for goods and services, and there is a need to establish widespread confidence in the financial integrity of a gold currency system. In some cases this will need a digital gold currency to be fully backed by physical gold, otherwise it is unlikely to attract and retain the confidence of users.

Additionally, the costs of using digital gold will need to be competitive in comparison with other payment methods, such as credit cards, bank transfers, and alternative digital payment methods, and there will need to be an increase in the availability of liquid gold debt instruments in which to invest. The success of companies who enter this market will depend on their ability to design and market digital gold products that meet the needs of consumers, businesses and investors to a greater extent than current systems, says the report.

Rahn argues that the real questions are not whether there will be digital money, but how long will it be before most paper currency and coin is eliminated, what portion of digital money will be issued by private institutions, as against governments and central banks today, and how much of that will be gold. Digital money will eventually become the dominant form of money because it is less costly to handle than cash, cheques, or credit cards, and it is more secure and efficient, he believes.

Institutions that currently own or produce gold are logical developers and marketers of digital gold products. "There are no longer technological reasons why private companies cannot create international gold-backed monies to compete with government-issued monies," says Rahn.

He points to the example of e-gold, an electronic currency issued by e-gold Ltd and 100% backed by gold. Other e-metals - silver, platinum and palladium - are also issued. Individuals or companies are invited to purchase or deposit gold (or silver, platinum or palladium). The gold is titled to a special-purpose Trust for the benefit of e-gold holders collectively and held in precious metals depositories.

Using this gold users can make purchases from and payments to other account holders either via the e-gold Web site, or using the e-gold shopping cart interface (an automated interface designed for integration into merchant Web sites) or by Web-enabled mobile telephones. The transaction is instantaneous; it is recorded and users may view their account history with details of all transactions at any time. Gold and Silver Reserve, the company which originally developed the e-gold system, and a number of independent companies provide exchange facilities from e-gold to national currencies on a competitive basis.

At the end of November 2000 e-gold had over 114,000 accounts, 48,000 of which were funded, and had over 41,000 ounces of gold in its reserve.

E-gold will soon be joined by GoldMoney, an e-commerce payment system designed to enable buyers and sellers of goods over the Internet to transact and make payments in weights of gold, called GoldGrams. Each GoldGram is divisible into thousandths of a gram (mils). GoldGrams are the unit of account and will be the electronic form of gold owned directly by users of the system and held in a precious metals repository. When a payment is made ownership of the appropriate quantity of gold will be automatically transferred from the payer to the payee.

The system, which is backed by several patents, is expected to launch shortly and will feature 24 hour global access with payments processed in real time.